A Clash Between U.S. And Iran Could Send Oil Prices Above $100 And Bad News For China

China’s next big problem won’t be in the South China Sea. It will be in the Strait of Hormuz.

That’s where both Washington and Teheran want to enforce their own freedom of navigation.

This prospect moves the US and Iran closer to a direct military confrontation. If that turns out to be the case, it will disrupt Middle East oil supplies and push crude oil prices above $100 level.

That could be bad news for China – because the Middle East supplies close to 50% of China’s oil imports.

It could be good news for American frackers, who will have to pump oil as fast as they can to make up any supply shortfall to America’s allies.

It could be good for Russia, which will have to sell more oil to its own allies, including China.

And it could serve Saudi Arabia’s interest in containing Iran.

For several years, Washington has been the de facto guarantor of the free flow of oil from the Gulf to its Asian and European allies. That’s a role Washington wants to continue to play, together with its close ally Saudi Arabia, an Iran adversary.

But this role has been challenged recently by Teheran. They, too, want to be the guarantors of the free flow of oil supplies to its own European and Asian allies, including China.

Where’s the problem then?

The American sanctions against Iran that will eventually have to go into effect, and pit America’s navigation rules against Iran’s rules. Thus, there is a potential for open military confrontation between the two countries that could send oil prices soaring.

“In case there is ‘a military accident’ in the Arabian Gulf, the oil supply route could be seriously disrupted,” says Athens based shipping expert Theo Matsopoulos. “When the markets are in critical point they are more sensitive and they translate facts more violently than they would during times of stability. It is not necessary for the Strait of Hormuz to be fully blocked, as happened in the Suez Canal in 1956. The expectation of a blockade and the potential for disruption could cause turbulence and shape a bullish market for crude oil.”

“All of the affiliated parties will need to be hedged and they will start buying long positions, inflating the price to levels above $70/barrel.”

It may be time for China to pay more attention to the Strait of Hormuz and less attention to the South China Sea.

I’m Professor and Chair of the Department of Economics at LIU Post in New York. I also teach at Columbia University. I’ve published several articles in professional journals and magazines, including Barron’s, The New York Times, Japan Times, Newsday, Plain Dealer, Edge Singa...